Make Sure You're Worthy of A Client's Trust

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Handling trust accounts requires a specific skill set on the part of attorneys. Lawyers must maintain the safety of the accounts via careful accounting and oversight of banking safety.

The lawyer is a fiduciary who must keep accurate accounting records of trust account transfers under the rules of professional conduct. That fact alone can give rise to ethical issues, as trust accounts can grow so large that a lawyer's record-keeping becomes flawed and prone to errors.

Such concerns are especially relevant in active personal injury or debt collection law practices, in family law practices, and in large-firm real estate practices. The errors may be understandable, but that won't serve as an excuse should the funds' record-keeping wind up unclear or inaccurate.

It happens in many ways: lien holders fail to cash checks written against the account; funds subject to a lawyer-client dispute remain long after the controversy is forgotten; funds are held back for a triggering event that never takes place; or a departed staff member has made an incomplete or erroneous record of trust finds that the lawyer can no longer decipher.

There is an axiom in law: "Ignorance of the law is no excuse." Every state imposes a fiduciary duty to properly account for clients' funds to prevent misappropriation or negligence. Failure to provide accurate accounting records for a bar inquiry means very bad news for the lawyer.

If an accounting issue does arise, one expensive resolution is to hire an outside accountant to go through every document, check and ledger to reconcile the account. Another suggestion is to open and operate through a new account with scrupulously "clean" records while allowing depletion of the old account until only the few questionable items remain (with the hope that no one makes an inquiry in the future).

But those alternatives miss the point. To do less than use an effective software accounting program or outside accountant to reconcile trust and bank account records each month is to invite error, inquiry and trouble — even putting one's professional license is at stake.

Another implication for the safety of trust accounts arises when any single account in one person's name exceeds the Federal Deposit Insurance Corp. guaranteed limit of $250,000. In an active family law, real estate, personal injury or debt collection practice, it's conceivable to grow beyond that cap.

However, the FDIC issued a ruling that all amounts in a client's trust account are protected, regardless of the amount. The account must be identified as a trust account, though, and the lawyer must be able to identify the amounts held for each client.

The FDIC ruling addresses the arguments that a lawyer would be exposed to personal liability if the bank holding a trust account failed, because it was, after all, the lawyer who selected the bank and who has an ethical responsibility to keep trust funds safe. That viewpoint would have mandated that attorneys inspect the financial solvency of their banks and vouch for the banks' stability. The FDIC's blanket protection on all client trust funds obviously provides some breathing room with regard to such a dilemma.

However, given that many once-unthinkable financial events have occurred in recent years, lawyers may want to further ensure that each client's trust fund is safe.

Attorneys can identify the name of the client in bank records and the amount of dollars held for that client, in effect creating sub-accounts. Another, more direct approach is to maintain a separate trust account for each client whose funds are likely to be held for an extended period of time. The interest on such a separate account will belong to the client.

Because these gestures increase trust fund accounting expenses, one might also consider providing in the client's engagement agreement for an administrative charge to cover the cost of the trust administration. The extra piece of mind that it provides for client and lawyer could be well worth it.

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